An agreed payment of $130 million to end a high-profile lawsuit against Moody's Investors Service was reached. This is said to be the second-largest recorded settlement in the world.
US largest public pension fund, California Public Employees Retirement System, filed a case against Moody's and two other rating firms regarding their negligent misrepresentation in 2009. They allegedly awarded flushed grades to residential mortgages that later became bad. The pension fund known as Calpers relied only on the ratings from these firms in order to buy bonds as per Wall Street Journal.
Calpers and the Standard & Poor Ratings Services which is also a part of McGraw Hill Financial also reached a $125 million settlement last 2015, according to CNBC. The S&P agreed to pay around $1.5 billion in order to solve the crisis-era lawsuits that were filed by the Justice Department which include more than a dozen states.
As reported by Bloomberg, Michael N. Adler, Moody's spokesperson, said that this is the resolution to the long-running litigation which involves the structured investment vehicles that the company has rated in 1995, 2002, and 2005. He added that it is for the best interest of the company and its shareholders.
Despite these challenges, investors are still relying on the ratings from S&P in order to decide whether to buy bonds or not. The industry's business model where banks and debt issuers pay rating firms to grade their bond deals are still in place.
The industry, however, is now under the watchful eye of SEC's new division which is dedicated to rating firms. They have already implemented new rules last year and companies are already increasing their compliance and risk management to avoid bond grades from swaying. According to Mathew Jacobs, the general counsel for Calpers, this incident should serve as a lesson to all investors who rely only on rating agencies to guide their investment.
